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Monday, April 14, 2014

Financial Comment - Biotech leads decline

Biotech leading the tech stock decline
In one of the previous blogs, we talked about the pullback in American technology stocks evidenced by the weakness of the NASDAQ Composite index. After a short-lived growth on April 8 and 9, the decline of the index has continued. Over the past month, the index has lost almost 5%.

Among the poorest performing segments of the tech sector is the biotechnology sector. As a result, investment funds focused on biotechnology are suffering redemptions. The withdrawals from the biggest biotech-focused ETF, the iShares Nasdaq Biotechnology ETF, on April 4 were the worst since its 2001 inception, with $372 million withdrawn, or 7.5% of the fund’s $4.98 billion in total assets (according to Drew Armstrong, Bloomberg).

These redemptions follow the boom in American health-care ETFs which attracted more deposits than any other sector at the start of 2014 and added $3.98 billion since January 1. That growth, in turn, was driven by a rapid rise in biotechnology sector’s stock values: the NASDAQ Biotechnology index gained 103% in January 2013 - February 2014, compared with a 47% increase in the NASDAQ Composite index over the same period. Both indices have fallen since early March, by 21% and 3% respectively.

According to Drew Armstrong of Bloomberg, equity analysts have split with regards to the future direction for the biotech sector. Some are questioning whether biotechnology stocks are in a bubble due to high valuations and high business risks of developing complex and expensive medicines. Other believe that biotech companies’ fundamentals are strong and expect sound earnings later this year.

As a sign of some investor trust in the sector, some health-care focused ETFs with more diversified assets did not experience large redemptions. For example, the Health Care Select Sector SPDR Fund, which also has pharmaceuticals and health-care products and services stocks, saw an inflow of $90 million on the biotech ETF’s worst day.